During the quarter ended December, though the year-on-year growth in cement demand was expected to be high due to the lower base of the previous year on account of demonetisation, the actual volume growth was much better at 30 %Rajesh Naidu | ET Bureau | April 13, 2018, 13:00 IST

ET Intelligence Group : After a dampened volume growth of under 6 per cent for the past five years, the cement sector is expected to report a turnaround in sales volume over the two quarters to FY19. It will be driven by factors such as the recent slew of consolidation among companies, incremental demand before the elections in various states and at the Centre, and traction in infrastructure and low cost housing segments.

During the quarter ended December, though the year-on-year growth in cement demand was expected to be high due to the lower base of the previous year on account of demonetisation, the actual volume growth was much better at 30 %.

The traction is likely to continue due to several factors. First, the next few quarters will have several state elections followed by the general elections in 2019. Historically, cement demand has gained momentum before elections given the increased impetus of the government on infrastructure development. Some analysts estimate over 7 per cent growth in cement demand in the pre-election period.

The second factor is the limited scope for further consolidation in the sector since most of the profitable acquisitions have already been completed by large companies such as UltraTech and Dalmia Bharat. This should reduce competition in the next two years. Third, in addition to infrastructure projects, the demand from individual home builders (IHB) and affordable housing will also enhance the sector’s operating profit before depreciation (EBITDA).

At the aggregate level, the sector’s EBITDA per tonne showed an erratic trend over the six years to FY18. In the coming two fiscals, however, analysts believe that it would increase by Rs 87-100 after dropping by Rs 69 in FY18. According to the Bloomberg consensus estimates, the earnings per share (EPS) of large cement companies is expected to grow by 33-90 per cent in FY19.

It will therefore make sense for investors to focus on companies that have a strong brand presence and wide distribution network since these attributes would help in implementing the volume growth strategy better than peers. Companies such as UltraTech Cement, Dalmia Bharat, JK Cement, Shree Cement and JK Lakshmi Cement seem well placed to take advantage of the opportunity.

Currently, the Goods and Services Tax (GST) is levied at 12 per cent on payments made for under-construction property or ready-to-move-in flats where completion certificate has not been issued at the time of sale.